Globalization and emerging markets
Subtitle: with or without crash?
By: Philippe Martin, Hélène Rey.
Contributors: Rey, Hélène.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 11550; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 11550.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Financial crises -- Developing countries -- Econometric models; Globalization -- Economic aspects -- Developing countries -- Econometric models
Description: "This paper develops a theory of financial crisis based on the demand side of the economy.  We analyze the impact of financial and trade globalizations on asset prices, investment and the possibility of self-fulfilling financial crashes.  In a two-country model, we show that financial and trade globalizations have different effects on asset prices, investment and income in the emerging market and in the industrialized country.  Whereas trade globalization always has a positive effect on the emerging market, financial globalization may not, especially when trade costs are high.  For intermediate levels of financial transaction costs and high levels of trade costs, pessimistic expectations can be self-fulfilling and may lead to a collapse in demand for goods and assets of the emerging market.  Such a crash in asset prices is accompanied by a current account reversal, a drop in income and investment and more market incompleteness.  We show that countries with lower income are more prone to such demand-based financial crashes.  Our model can replicate the main stylized facts of financial crashes in emerging markets.  Our results strongly suggest that emerging markets should liberalize trade in goods before trade in assets"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/25/2005.

Includes bibliographical references.

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